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Income-Driven Repayment Plans for Student Loans

Guide to Income-Driven Repayment Plans
Rebecca Safier
Rebecca SafierUpdated March 27, 2023
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If you’re struggling to keep up with federal student loan payments, consider adjusting them with an income-driven repayment (IDR) plan. Income-driven plans can reduce your monthly payments while giving you more time to repay your debt. And if you still have a balance after 20 or 25 years, it could be forgiven. Here’s what you need to know about income-driven repayment plans and how they work.

What Are Income-Driven Repayment Plans?

The government offers income-driven repayment plans for federal student loans. The new one is called the Saving on a Valuable Education (SAVE) Plan. Like other income-driven repayment (IDR) plans, SAVE calculates your monthly payment amount based on your income and family size.The SAVE Plan provides the lowest monthly payments of any IDR plan available to nearly all student borrowers, according to the White House. You can apply for SAVE now. The four plans already in existence are:
  • Income-Based Repayment (IBR) 
  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Contingent Repayment (ICR)
All of these plans adjust your monthly payment to 10% to 20% of your discretionary income while extending your loan terms to 20 or 25 years. While these plans are similar, they do have some important differences. It’s a good idea to learn the details of each plan to figure out the right one for you. Alternatively, you can simply ask your loan servicer to give you the plan with the lowest monthly payment. Even so, it can be helpful to know what the different plans consist of.Recommended: 8 Most Common Repayment Options for Student Loans

How Income-Driven Repayment Plans Work

Unlike the Standard Repayment Plan, which gives you a fixed monthly payment over 10 years, each IDR plan bases your monthly student loan payment on your discretionary income and family size. Discretionary income is the difference between your income and 100% or 150% of the poverty guideline for your state and family size. If you’re unemployed or have a low income, your payments could be as low as $0 per month. Some income-driven plans also base your payment on when you took out the loans or whether you borrowed for undergraduate or graduate school, as you’ll see below. This student loan payment adjustment can be helpful if you’re having trouble affording your payments on the standard plan. 

Different Types of Income-Driven Repayment Plans

This is what paying off student loans on each income-driven repayment plan looks like. 

Income-Based Repayment (IBR)

The Income-Based Repayment plan adjusts your payments and terms depending on when you borrowed. If you were a new borrower on or after July 1, 2014, your payment will be set at 10% of your discretionary income and your repayment term will be extended to 20 years. If not, your payment will be set at 15% and repayment term at 25 years. While most federal student loans are eligible for at least one income-driven plan, some plans require you to consolidate Family Federal Education Loans (FFEL) to make them eligible. IBR, however, accepts FFEL PLUS and FFEL consolidation loans, as long as the loans weren’t made to parents. IBR does have an income requirement. To qualify, your payments on IBR must be less than they would be on the Standard Repayment Plan. If they’re not, you probably wouldn’t benefit from IBR anyway. The IBR plan has a useful interest subsidy for borrowers. If your monthly payments don’t cover all your interest charges on your subsidized student loans, the government will cover the difference for up to three years. Note that you’ll be responsible for paying all the interest that accrues on any unsubsidized loans. 

Pay As You Earn (PAYE)

The PAYE plan is a bit more straightforward than IBR. Regardless of when you borrowed, your payment will be set to 10% of your discretionary income and the repayment term will be 20 years. Similar to IBR, you can only qualify for PAYE if your payment on it will be less than what you’d pay on the standard 10-year plan. PAYE also offers the same interest subsidy as IBR. If your payments don’t cover your full interest charges on your subsidized loans, the government will cover the difference for three years. 

Revised Pay As You Earn (REPAYE)

Like the PAYE plan, the REPAYE plan currently adjusts your monthly student loan payment to 10% of your discretionary income. Unlike PAYE, however, REPAYE sets your loan terms at 20 years if all your loans on the plan were for undergraduate study and 25 years if any of your loans on the plan were for graduate school. The REPAYE plan does not have an income requirement. However, if your income increases, your payment on REPAYE could end up higher than it was on the standard plan. REPAYE has an even better interest subsidy than IBR and PAYE. If your payments don’t cover all your interest, the government will cover all the remaining interest due on your subsidized loans for three years and 50% after that. It will also cover 50% of the remaining interest due on your unsubsidized loans the entire time you’re on the plan. The REPAYE plan does have a potential downside for married couples. It will take both incomes into account when calculating your monthly payment, even if you file your taxes separately. The other income-driven plans only take the primary borrower’s income into account if you file your taxes separately. If you file jointly, though, all plans will base your payment on both incomes. SAVE is replacing the REPAYE plan.

Income-Contingent Repayment

The Income-Contingent Repayment plan has the highest monthly payment of any of the income-driven plans at 20% of your discretionary income. It also has a long repayment term of 25 years. ICR doesn’t offer an interest subsidy. For these reasons, ICR is probably the least appealing option to most borrowers. However, it’s the only income-driven repayment plan for which parent loans are eligible — but you’ll have to consolidate parent loans first with a Direct consolidation loan. If you borrowed a parent PLUS loan or other federal parent loan to help your child pay for college, ICR is your only option for income-driven repayment. Recommended: Your Guide to Choosing a Student Loan Repayment Plan

How to Apply for Income-Driven Repayment

You can apply for income-driven repayment on the Federal Student Aid website. When you fill out the application, you can request a specific plan or ask your loan servicer to select the one with the lowest monthly payments for you. You’ll need to recertify your income every year to remain on the plan. Due to recent legislation, borrowers can self-report their income when applying or recertifying their plan until six months after the pause on federal student loan payments ends. You won’t have to provide tax documentation like you normally do during this time, but instead can self-report your income online or over the phone. 

Pros of Income-Driven Repayment Plans

Here are some of the benefits of putting your federal student loans on income-driven repayment. 

Lower Student Loan Payment 

An IDR plan may result in a lower student loan bill. You’ll never have to pay more than 20% of your discretionary income, and some plans cap your payment at 10%. In fact, your payment could be as low as $0 per month, depending on your income. 

More Time to Pay Back Debt 

Income-based repayment plans extend your loan terms to 20 or 25 years, giving you more time to pay back your debt. If you have a low income, a lot of student debt, or both, having more time to repay your loans could help relieve some stress. 

Qualifying Plan for PSLF 

If you work in public service, you may consider pursuing loan forgiveness through Public Service Loan Forgiveness (PSLF). To be eligible, you must make payments on one of the four income-driven repayment plans. PSLF forgives the remaining balance on your Direct loans after 120 qualifying monthly payments under an IDR plan.

Potential for Loan Forgiveness 

Income-driven plans can end in student loan forgiveness if you make on-time payments and still have a balance at the end of your term. 

Cons of Income-Driven Repayment Plans

Before applying for an income-driven plan, consider these potential downsides as well. 

Higher Interest Charges 

By extending your loan terms to 20 or 25 years, you’ll end up paying more in student loan interest overall. Let’s say that you owe $30,000 at a 5% interest rate. Over 10 years, you’d pay $8,184 in interest. But over a 20-year term, you’d pay $17,517. Over 25 years, that amount would increase to $22,613. Although your monthly payments might be lower, your loans will become more expensive overall. 

More Time in Debt 

With an IDR plan, you’ll end up spending a decade longer (or more) paying off student loans than you would if you stuck with the standard 10-year plan. If you can pay off your loans faster, you could use that money to save for retirement or meet other financial goals. 

Forgiveness Can Be Taxed 

Although you may currently receive loan forgiveness after 20 or 25 years on an income-driven plan, that amount could be considered taxable income. That means you might have to pay taxes on the amount you receive before you can finally say goodbye to your student loan debt. However, taxes on loan forgiveness have been waived through 2025. 

Private Student Loans Are Not Eligible 

Private student loans are not eligible for federal income-driven repayment plans. If you have private student loans, you’ll have to look for another strategy for managing your debt, such as applying for deferment (if your lender offers it) or refinancing. Refinancing your student loans helps lower interest rates for private student loan borrowers with strong credit in some cases. 

The Takeaway

Income-driven plans can be helpful if your student loan payments are breaking the bank. They offer an easy way to adjust your monthly bills and get extra time to pay what you owe. Before you apply, though, remember that adding years to your debt will increase your long-term costs due to interest charges. If you’re comfortable with this trade-off, you can apply for an income-driven repayment plan on the Federal Student Aid website or by contacting your student loan servicer. 

3 Student Loan Tips

  1. Once the pandemic-related pause on federal student loan payments ends, going back to making payments may be hard on budgets. One solution is to refinance to a lower interest rate, longer loan term, or both, depending on your situation. (The tradeoff is that you’ll be forfeiting federal benefits such as repayment programs.) Find and compare your student loan refinance options.
  2. One pain-free way to pay down your student loan sooner: send in your tax refund to put against the principal balance. Since it’s money that has already been taken out of your pay, you won’t miss it.
  3. If you teach full-time for five complete and consecutive academic years in a low-income school, you may be eligible for federal student loan forgiveness.

Frequently Asked Questions

How does IBR work for student loans?
Are income-driven repayment plans a good idea?
What is an example of income-driven repayment plans?
Photo credit: iStock/Geber86

About the Author

Rebecca Safier

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
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